The German banks have weathered the euro area crisis well thanks to the solid fundamentals of the economy and the safe haven status of German financial assets. Nonetheless, lending growth has fallen in real terms in recent years, reflecting weak demand. The banks are vulnerable to any sharpening of financial market tensions in the euro area and the low interest rate environment. Large derivative exposures among the country’s largest banks, high leverage and market perceptions of strong implicit government guarantees add to these risks. While the public savings banks have performed well and help sustain activity in relatively poor regions, performance among the public Landesbanken has been weak both before and after the global financial crisis. In some respects, the government has moved ahead of many other OECD countries with reforms to reduce risks in the financial sector. Nonetheless, further steps to make the banks more robust would reduce financial risks to the government and improve incentives for banks to take advantage of low interest rates to finance strong, sustainable economic growth. Such steps should include reducing high leverage, ambitious implementation of EU requirements for the reform of resolution legislation and addressing governance problems in the public banking sector.